We spoke with Alex Konoplyasty, co-founder of Flashpoint Ventures, about big global trends, the possible implications of the war in Eastern Europe, and why it's still early days of greentech investments in the region.
London-headquartered Flashpoint manages assets worth 450-500 million and is known for investments in the firms like Chess.com and Guesty.
A few key takeaways from Alex Konoplyasty:
"In this type of environment, we recommend our portfolio companies raise money as soon as possible. If they're raising money now, they should like to keep raising. If not, they should go out and start rasing right now, as fast as they can. Valuation is less important; I think it's more important to capitalize yourself for the next couple of years to make sure you have capital."
"We don't know how the consumer is going to adjust to this, like the terrible shock that is happening around the energy. Maybe they adjust in the way that we don't expect today, then maybe it's not going to be so bad as we expected, right? And we've seen historically people do adjust in shock situations - when it's gradual, it's sort of okay, but when it's like shock, people tend to change their behavior."
"In 2015, after Crimea, I decided that I didn't want to do anything with Russia. At all. We don't do any business in Russia. Like, we didn't do anything there after 2015. It was a very strategic decision for us."
Welcome to the NatureBacked podcast of Single.Earth. We talk with investors about their vision of the new green world in this series. My name is Tarmo Virki. And in this episode, I'm speaking with Alex Konoplyasty from Flashpoint Ventures. Enjoy the show.
Hi, Alex; welcome to the NatureBacked podcast. Tell us a few words about Flashpoint to start off with; how was Flashpoint born?
Thank you. It's a great pleasure. Thank you for having me and inviting me to this interesting discussion. By way of introduction, I'm Alex and Co-Founder and Managing Partner at Flashpoint. I am Ukrainian, Russian by origin. I was born in Kyiv. So in the current environment, I'm in a peculiar position. And as we've been talking, the world is upside down. I think that's exactly how it feels right now.
After university, I got a job at Morgan Stanley in London. And afterward, I have worked at UBS. I have always focused on and worked for basically telecom, media, and technology in my professional career as an investment banker. So I've been buying companies, selling companies, taking companies public, and have done loads of these. And then after the financial crisis in 08, I thought that it's become a bit boring, but also I had become a director, at where I was.
I started thinking about my own thing. And I have a friend, today, my partner, Michael, we went to university together, Michael's Hungarian. We shared the dormitory room and have known each other for 25 years. Michael had a similar professional background working for finance and private equity. And similarly, he started feeling that we have enough expertise and knowledge and made some capital to maybe do something ourselves. Flashpoint started with us investing our own money into a startup doing insurance price comparisons for online insurance. So that was like the first investment done, with our own money. Today, Flashpoint manages about 450-500 million assets under management.
We are an international company focusing on investing in technology companies at various development cycles. So originally, we started with venture capital. Over time, we basically realized that no, similar to our previous background, when we meet the company at an early stage - today we're meeting about several thousand of these companies every year - if you do only venture capital, you build a relationship with this founder, you spend time with him, you try to help him even before you give some money, on pro bono basis, we try to help him and stay close to him and build this relationship, which might turn into like a marriage partnership or you know, also financially. But if you have only one product, venture capital product. In that case, it's a bit illogical because you spend all this time building this relationship, and you had only one chance to give him money to me. So that wasn't working. As a banker, I could do M&A, IPO, I could do you bonds, I can do brokerage, I can do loans; I can do so many things. So I build a relationship with the company, then I can give 15 different advice or service to the company. Here I have only one. That felt a little bit illogical, and we decided that we wanted to do more products. So we have, we have launched two more products so far, two more strategies. We launched a venture-debt strategy, which comes after our venture capital strategy, so they don't compete against each other. So venture capital is early-stage capital for companies in the early stage of development. Venture debt is the next stage where you have already raised venture capital money, etc. So you can afford in your development where you can do venture debt. Now also, we have a secondary liquidity Fund aimed at an even later stage to enable people like ourselves. We felt that, when you're an early investor, it's very hard to sell your stake. So you've been an investor for eight years, let's say ten years in the company, too long. And the company still didn't find you an exit, right? We manage, you know, other people's money. We have investors who give their money to manage; we have fiduciary duties to them. We must exit at some point, right? We cannot stay forever. Unfortunately, very few people are actively doing this, like liquidity and cleaning up the market, so we decided to also do this product. We have some more product ideas.
Flashpoint today: we are a team of about 30 people; we have offices in Riga, Warsaw, Budapest, Tel Aviv. And we support founders originating out of Eastern Europe doing business internationally, just by way of a brief introduction.
No worries at all; it gives us context quite nicely. How many companies are you involved in today? How many investments are in your portfolio?
So far, since 2012, when we launched, we have supported about 50 companies, we have done about 11 exits out of them, we have lost maybe one or two companies, which were like, very early stage, so we had a couple of write-offs only. And then today, we manage a portfolio of about 40 companies. Most of them are united by the fact that the founders originate from small countries in Eastern Europe and Israel, so what unites them is that these are very small markets, domestic markets, so you cannot build a company inside such a market as you could do in Germany, or France or some other place. So you must do several things; you need to try and scale your product outside. So you need to build sales and marketing outside your geography. You need to understand what product you need to build because customers have different, you know, preferences right outside your home market. You need to explore that you need to hire people outside your home geography, which is sometimes challenging because you don't speak the language. As well, you have cultural differences, right? So you need to build it, and you need to raise capital outside your geography. So all of these founders are united by these common problems. And we as an investor, at the time, when we come in, these are the this is the set of problems that we're focusing on to help the founder, not only just giving some money, but stay close to him and help him on a daily basis, solve these challenges and think about these problems, how to, you know, build the company.
Very much true. Launching companies out of Estonia, you kind of understand that you have to be born global. Otherwise, it's kind of pointless.
That's absolutely true. And then I think our DNA has been, because, you know, we've, we've grown up in these international organizations: organizations that historically have been built, in the only way to build a large international corporation like Morgan Stanley, you can build it on your values, right. So otherwise, it's very difficult. So within my DNA, you know, what we've experienced as professionals, in those careers was this, you know, DNA of international, sort of corporation building, right, these values, and I think a lot of these values come to the core Flashpoint. So for us, you know, saying, it's, it's very much important, they are building blocks in your work that determine what and how and when you do. And for that matter, the thing to mention is that our strategy is also very much tailored towards that. There are a lot of things that we don't invest in. So for us, the areas we're investing in are very important. For example, we don't do lending, right? We don't do any lending because I feel that giving people weekly or monthly loans at the 50% interest rate is not good for us, right? We don't want that. So we don't do that. We would never, like, there's been a boom of like marijuana, and like all of this "health" sort of stuff, we don't do that. We don't think it's right for us to be doing that. We don't do any, like gambling, we don't, we don't even do gaming. Because we think that we want to be investing in supporting companies and founders whose mission is to change the world for the better. And where there is a fundamental value in what you're doing. So for that matter, for example, we've been investing a lot in education. So 10 companies out of this 50 that we supported are in education; we have a number of companies in health care. We supported a whole lot of companies around that. We've been investing in companies that are supporting - one company out of Finland that is doing third-party logistics: for them, ESG and environmental friendliness and co2 savings, etc., are quite important to what they're doing. So we've been in we actually have several companies like this domain of like logistics delivery, making sure that you know Which helps on emissions, and all of that stuff. So for us, these are the domains, although we don't have like an articulated strategy around ESG. But for us, inadvertently, this was always what we were discussing right now. Because the way we make decisions also is that we have like a scoring system. We're working in a way like a bank. When we analyze the situation, we need to fill in the scoring and collect the data. So we're thinking about adding an ESG score to the scoring. But in general, for us.
This thing is important. Another thing I think is important to mention in our discussion about like sustainability is that I think it's important not only in what you're investing but also like what you're doing as an investor in your company. And for that matter, I think for us, the way we see ourselves is that we are helping to build corporations. For us, corporate governance, transparency, reporting these things, they're super, super important, right? A lot of the founders from our geography, because a lot of them are first-time founders, don't have as much experience. They've never built companies in their life. Also, they come from geographies that historically have not been as high on corporate governance. And a lot of these people, by way of their education and work, haven't had this exposure, or experience in general, how to build and what are the perspectives. I'm not necessarily saying that the West is good; the East is bad. I'm just saying there are different perspectives, right? If you have had many perspectives, you can make your own picture and decide for yourself what is good and what is evil and which way you should be growing.
Right. So I think we, we, I feel like we have a lot of this picture that we are bringing to the organization to help, you know, a lot of companies have gone through from, you know, very small scale to now having like, you know, audit committees. So I'm like, for example, in one of the companies, I'm chairman of the audit committee, the company like pre-IPO company. So they never had anything like that. But now there's an audit committee, there is a procedure, and there are rules or regulations that need to ensure transparency and governance of what you're doing. So for us, this is super important. The other thing to mention here is that we've been all like over these 10 years; for us, and for me personally, being part of the like local ecosystem and helping the local communities in whichever way possible is very important. So we've been working with, we in for that matter, we work a lot with local early-stage investors, incubators, accelerators, angels, we produce a lot of content, we produce a lot of tools, we organize our events. So we proliferate, and we want entrepreneurship in this region to prosper. We want it because, for us, this is very important that there are many of these people who are. That's one of the reasons why we are very focused on the scouting program; we have relaunched and relaunched again. We're trying to make sure that our scouting program works, we want to engage many people in this world, we want to make sure that we are actively involved; we started working with local universities because I think that students and helping students is very important because for them, you know, they are basically only starting, and a lot of them don't have an understanding, you know which way to go, etc. But we do want to support technical students out of university. So we're starting to launch, you know, some smaller vehicles for super early stage. And then lastly to mention we just announced, well, we're in the process of announcing, so you will be one of the first ones to know. But we will also like, in the current Ukrainian war, we've been quite spending a lot of time, you know, protecting not only our relatives, who have become victims of this war, but also many employees of our companies, because, you know, our companies, companies employ about 2,500-3,000 people. So it's a lot of people who are employed by our companies. And just by virtue of geography, many of them, of course, have offices in Ukraine and Russia and many developers. So we've been helping a lot of these people; there are hundreds of people who got stuck and who are who need help. So we as an organization, and personally, we've been helping both Ukrainians suffering, with different types of aid, etc, but also trying to, you know, help these developers and their families to get out of the conflict area. So, and not all that basis, we decided to launch an initiative which we're calling Flashpoint cares, which we're about to launch, and this initiative will aim to systemize our work around these areas. Helping local communities, education and health, and safety. So we, as Flashpoint, we want to be doing, you know, not we do a lot of things, but maybe a little bit sporadically today. I want to organize everything into a more streamlined strategy where we have an approach where we systemically along these lines, we are helping, you know, these people.
That's very, very cool; we all try to do it on some level. How do you see this effect of the world going crazy - the war, the energy prices, all of that, maybe the new Iron Curtain in Europe or something like that? How do you see this impacting the kind of green scene? Is it? Last winter, we had at least a time when carbon and sustainability were on top of the agenda for a lot of Europe. Today seems all the headlines are about the war. Do you think it will kind of turn this somehow?
I think, in general, it not only connected directly to the war, but in general, I think the trend over the last several decades has been, there has been like two large drivers of the like in overall social agenda. One is the proliferation of the Internet and the awareness of people. Right? So you have a billion people living in Africa. You have several billion people living like Asia, who live in very, very poor communities, right? People live beyond the level of poverty that we in Europe even can think about, right? Not even like to imagine because in the UK, they just announced that because of the energy prices, there'll be 5 million households that will go sort of the phrases it very interesting below the level of like, like energy, poverty or something, right. But it's households making like 5,000 pounds a month, right? They're like 3,000 pounds a month, and they're going to some level of poverty. We forget that in Africa, a lot of people live like $1 a month and don't have anything. So what Internet changes and technology changes is that these people become aware, right, that, you know, there are another 2 billion people living much, much better than they do, right? When the war happened. And we've seen this with the immigration crisis in Europe with the Evia happened, Syria happened, all of these, like, you know, conflicts started happening. You know, how do you fight? Escalating conflict, social unrest? You put people on boats, right? You just put people on boats? So you know, there is less escalation of unrest in these local countries. Right. So I think in general, and that's what we're roughly seeing right now, with the Ukrainian and Russian front, because you have 5 million people escaping this war zone, right? Will they come back? We don't know what's going to happen to them. But there's a huge migration wave of people who don't have homes, don't have money, don't have anything, they just escape; a lot of them do, of course, but a lot of them don't. So there is a whole lot of this migration. In Russia, many people who are like, finally realize that they disagree. They are fleeing the country, and like hundreds of 1000s if not a million people leaving to Dubai, Europe, wherever they can leave, wherever they can get access to their savings just to escape from all that nonsense. So not to be part of it. Because a lot of people don't support what's going on. They don't want to go to jail for their views, but they escape.
I mean, like myself, I mean, in 2015, after Crimea, I decided that I didn't want to do anything with Russia. At all. We don't do any business in Russia. Like, we didn't do anything there after 2015. It was a very strategic decision for us. I think that in general, driven by the Internet and the world of communications, a lot of people not only because of the war but in general, a lot of this like social, like happening, right? Because people realize that they're poor, somebody was better than them for whatever. We've seen a lot of this like rising the last years in US right, we have a lot of this like, right-wing appearing, a lot of this nationalistic movement, a lot of protectionisms. A lot of people are now saying that globalism is over, right? Because people and businesses are not so secure to outsource production to China, to India, to somewhere else. So they want production to be in the US. Yes, it will be more expensive. But you know, they want to control, make sure there are no disruptions of these. Like in COVID as well. It's a good example. Countries were closing down differently, right? There was no unison of like, who's doing what, even now like if you look at Australia, they went ballistic, like closed down everything. Some countries said no COVID, like Sweden link like, you know, like some other countries that said, Listen, you know, it's okay We'll get by somehow, people will get sick, anyway. People will.
It's hard to make any conclusions now, but I think that a lot of this stuff will be changing globalization. The global trends are changing for sure. So changing globalization, rising poverty, a lot of social unrest, nationalism, swinging to the right. A lot of these trends we're seeing and like Russia, Ukraine in my mind, it's also the outbursts out of all of these trends that have been like developing on the one hand. And then, on the other hand, I think Europe is in a bit of a tricky position because it's like in the middle and also it's gone through its own development. Because we just got Brexit, the European economy is aging, right. So people are aging, you need a new workforce, countries have to be protective against immigration. Brexit actually kicked a lot of Eastern Europeans or Europeans out of the country. Suddenly people had to leave. And you know, in the UK, right now, it's a big problem, right? There are no jobs, no workers, you know, you have truck drivers, you have tonnes of industries, sectors like you do construction, you don't have you cannot import goods from Italy anymore, because, you know, they're stuck on customs for a reason, right? There's a lot of this disruption happening. So I think Europe is particularly in a tricky position. And also with a conflict of Russia-Ukraine, I think it's, you know, it's even more so peculiar, because of the dependence on energy and all of this stuff. So the bill is gonna rise. And, you know, what Europeans are going to do? It's, I mean, there could be a scenario where once the war is hopefully over, and peace settles that Ukraine could be one of these factors for the unification of Europe. And people will say, let's support European countries. It's like a Marshall Plan after the Second World War, right. Here's half a trillion euros; we print them from EU companies. Here's the money. Go, let's reconstruct Ukraine. It is good for Ukraine, but it's also good for Europe, because then, you know, a lot of these companies take money home. There is like finance growth that was actually not spent on stock markets. After the oil crisis, all this liquidity went to the stock market, and that's why we've had this bubble popping up. They're reconstructing bridges, roads, and stuff like that. They don't need to be buying them. They just need to go and build them, like rebuild them. But it's European capital for European companies, and subcontractors. It could be it.
And then the last thing to mention, I think that there is like people in the times of shock. At the time of crisis, people start behaving differently. So our analysis today is, of course, we say oh, it's so bad. It's a crisis, the war. So today seems terrible and awful. But people adjust differently, right? So people say, okay, energy prices are going up, okay, I'll not take a ride. I don't own Range Rover anymore. I'll own a cheap car. And by the way, I'm gonna walk to work, right? I'm gonna ride the bike to work. And all of a sudden, the consign, you know, the energy spend shrinks, right? So we don't know how the consumer is going to adjust to this, like the terrible shock that is happening around the energy. Maybe they adjust in the way that we don't expect today, then maybe, you know, it's not going to be so bad as we expected, right? And we've seen historically people do adjust in shock situations - when it's gradual, it's sort of okay, but when it's like shock, people tend to change their behavior. Similar to COVID, right. COVID hit, people stopped traveling, people stopped doing their usual routines, and Zoom appeared right. We don't meet each other anymore, we talk on Zoom.
I think that must have been part of the Zoom business plan, right? But seriously, I wanted to ask you a bigger picture question about Eastern Europe. To me, it seems that many of the East European startups are focused on B2B, focused on maybe some kind of business services. They tend not to, at least historically, focus on sustainability, environment, CO2, green, all these topics. Have you seen any change in that term?
If you come from a poor family, the first thing you need to achieve is to make sure you feed your family, buy the real estate, feed them, buy them clothes, ensure that your mom has insurance and all of that stuff, right? The environment comes way, way after all of these basic necessities. It's like Maslow's pyramid, what we learned in macroeconomics and microeconomics at university.
I think it's also like old money versus new money. So I think Eastern Europe in that way has been more like newer money versus Western European older money, where, you know, people start actually thinking about the home where they live, and caring about the home, I think the new money is sort of less conscious about it. I mean, it's natural. So there is nothing wrong with it. Nothing bad. I think that, in general, it's evolving. As the average level of welfare in Eastern Europe is catching up and growing, it will be a natural trend that people will start thinking a lot more about the environment and homes where they are living. That's number one; that's on the founder side.
Number two is more on the capital side, right. So if you look at the type of capital ... let's say Sequoia is advertising everywhere that their money comes from non-government organizations. So predominantly, they take non-governmental money that they're then investing in startups, and then that determines the length of period that they're prepared to hold the capital, but also things that they're sort of led to do, because the people give the money to, right, they sort of have an agenda, right? In a way, so if you are like ourselves, we're financed mostly by family offices, we have some, we're starting to have institutional investors, but most of these institutions, they're still like more commercial. For them, it's more about IRR returns and less about the environmental agenda. We're in the middle; we're the middleman. We want to give money to founders, but we also have the capital that we need; we have fiduciary duties towards these people. So the more we become institutional, the more we take money from, like endowments of the universities. In Eastern Europe, none of the universities have such endowments as Harvard, Stanford, or anybody, right? Nobody has billions of dollars or like tens of billions of dollars to invest in startups, right. So once, and it takes time to accumulate, so once this also starts changing, wealth accumulates, it will determine different types of agenda, right. That's why we launched Flashpoint Cares because we want to recycle this agenda; we want to give back what we made to make sure that these people also stand up, they move, and we change the slowly, slowly we move in that direction.
The overall picture is that slowly the region is moving, but have you actually seen evidence that we are seeing startups in Eastern Europe popping up focused on climate tech or green tech?
Absolutely. We have actually seen several dozen companies that are thinking, that are going for agriculture and green tech. And yes, absolutely.
Thinking about clean energy. Some of these areas are more technical, so for us as an investor, we are not as technical and product-driven. But absolutely, there are many companies like we actually do get agriculture and Agri tech. There are a lot of things that are happening there. We just have not; we have not invested in any of these companies. But it is nothing to do with the companies. They continue; it has to do more with our focus on, how we understand and how we can contribute. But there are, absolutely, absolutely. We were seeing some of these businesses appearing.
Also in Estonia, I think we've seen half a dozen at least startups popping up, which are somehow related to carbon.
It's slowly appearing. It's not a massive trend. Because I don't think that there is demand for it in this part of the world that much. In Europe, and in the US. There is like a demand. There's a demand by corporations by governments, industry in eastern Europe there is no demand. So come thing is just the founders themselves.
However, going back to the beginning Eastern European companies tend to be from small countries; the companies have to be born global. They're starting to do things from scratch for global markets. But slowly starting to wrap up, looking into this year, what are your big focus areas? I mean, in addition to somehow managing the impacts of the war in Ukraine?
Well, we can't manage anything related to the war; we just have to wait until it is over. But likely we're not impacted in our business directly that much, of course, people etc, things we discussed. But the focus here is on this year. We've been consistent in our strategy since 2012, and we continue the same strategy. I don't plan to change anything in our investment strategy. I think the difficulty of investment businesses that you cannot see ... My mother always asks me, okay, so how are things - has it been a successful quarter for you? Mom, listen, you know, five years from now, I'll tell you if this was a successful quarter or not. So it's a longer-term cycle. And if you change your strategy, if you change your approach too much or too often, then you can't understand whether you're doing the right thing. So we stick to our strategy, we continue supporting early-stage founders, we continue supporting them in building B2B software companies, and we try to develop ourselves and be more helpful. Like one of the things we're thinking about this to maybe open an office in the US as well, because like a third, or maybe even half of our portfolio, they do end up slowly selling more in the US and relocating physically or building more presence. Hence, they need us there a lot. We have ideas about building some value add units, like HR, for example, it could be more helpful in coordinating hiring efforts or within our portfolio companies, maybe even helping them to hire people in some of these Western markets. So there are things that we want to draw or develop. But for us, we were lucky to raise also, before even like the turbulence started in general, even not the war because also there was some market meltdown starting in like, October, November, when the capital markets started to shut down. And there was like, a lot of turmoil. I mean, interest rates rising, I think, and like with the energy prices increasing. All of this stuff and energy, energy distribution in Europe, I think that disposable incomes will decrease, profits of corporations will decrease. I think we're on the verge of this, like the global correction in a major way; it has to happen, right? Because, like, we've been in the bull market for a decade. So now some correction will happen for some sectors, some industries, maybe not like everything will correct. Still, certain areas of the capital markets will correct in terms of asset pricing and valuations. So in this type of environment, we recommend our portfolio companies raise money as soon as possible. If they're raising money now, they should like to keep raising. If not, they should go out and start rasing right now, as fast as they can. Valuation is less important; I think it's more important to capitalize yourself for the next couple of years to make sure you have capital. Most of them are loss-making because they grow, they acquire customers. And they need to have liquidity. So if you're running out of money in August-September, you must run and raise money now. You can't afford to be in this situation because there's a lot of uncertainty.
So that's what we focus our agenda on. Supporting founders, making sure that it's stable businesses. Well-capitalized, valuations are less important. It's more important to be stable. Focus on your priorities. Also, refocus your priorities; maybe you don't need to do ten things, do five things, or three things. I think you need to be aggressive in a competitive environment, but you also want to survive in the end. Because if there is that correction that could happen, you want to make sure that you are prepared in advance.
Because we have companies like in COVID unfortunately, I mean, all survived, all fine. We managed to cut the costs from severe positions. But we had companies that raised money just before COVID, for example, in October, November, and they went on a hiring spree ... until like March for like five, six months. They do hiring, hiring, hiring, hiring. So that's the cost. And then you cannot fire people like overnight, right? Because there are local regulations, you need to give severance packages and everything, That's another cost. And then you raised your round, and you lost like half of it, like a lot of it, because you went through this like a roller coaster. And that's why I think it's important.
I think cautiousness is probably a good guideline for startups this year. And, you know, focus on what you do to make it a success story.
Thanks, Alex, for your time today. Join us again for the next episode. Thank you for listening. If you liked the show, please give us a good rating and leave the feedback in your podcast player so others will find it too. We will be back next week. Turn on to the NatureBacked podcast.
Transcribed by https://otter.ai